Using Supra-Covered Bonds to Enhance Liquidity in the Euro Area: A Proposal for the Post-COVID-19 Recovery

12 Pages Posted: 2 Jul 2020

See all articles by Stefan Zeugner

Stefan Zeugner

European Union - European Commission

Matteo Salto

Directorate-General COMP, European Commission

Stefano Zedda

Universita di Cagliari

Date Written: June 2, 2020

Abstract

The discussion on the necessity of a larger volume of very highly quality (VHQLA) and liquid asset in the euro area has been very extensive. The debate on expanding the pool of comparable euro area assets focuses on “safe assets”, often on various combinations of government bonds, most of which would not entail a strong increase in euro VHQLA. This paper explores a different option, complementary to the existing ones, based on the creation of a safe European asset backed by fully private assets. The idea proposed in this paper is the issuance of supra-covered bonds by a central European institution. The latter are bonds issued by the central issuer and backed by covered bonds, which banks would have created using their mortgages as their cover pool. The aim is to increase substantially the outstanding amount of euro VHQLA. Such an asset would be very beneficial also during crisis periods, like the current COVID-19 crisis, by allowing banks to transform mortgages into very high quality and liquid assets that can be used for funding and as a collateral in operations with the Eurosystem, thus enhancing the possible credit sustain to the SMEs. This paper assesses the main effects of such proposal on banks under different possible scenarios.

Keywords: Supra-covered bonds, liquidity, euro

JEL Classification: E58, E47, E42, G21

Suggested Citation

Zeugner, Stefan and Salto, Matteo and Zedda, Stefano, Using Supra-Covered Bonds to Enhance Liquidity in the Euro Area: A Proposal for the Post-COVID-19 Recovery (June 2, 2020). Available at SSRN: https://ssrn.com/abstract=3640262 or http://dx.doi.org/10.2139/ssrn.3640262

Stefan Zeugner

European Union - European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Matteo Salto

Directorate-General COMP, European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Stefano Zedda (Contact Author)

Universita di Cagliari ( email )

Cagliari, 09124
Italy

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